Your Finances: Rethink retirement-plan withdrawals

It is human nature to put off painful situations, such as paying or incurring tax liabilities, for as long as possible.

Laura Medigovich

It is human nature to put off painful situations, such as paying or incurring tax liabilities, for as long as possible.

However, with the potential of increased income tax rates in 2013, it might make sense to go ahead and take the tax hit this year.

This may be especially true if you turned 70 years old in the first half of the year — any time from Jan. 1 and June 30, 2012. If you did, then according to the IRS, you officially turned 70½ this year.

The federal government mandates you must start taking required minimum distributions (RMDs) from your employer-sponsored retirement plans, such as a 401(k) or 403(b), as well as traditional IRA, SEP IRA and Simple IRA accounts, during the year you turn 70½ years old.

The IRS requires you to start taking these distributions because they want their tax revenue. If you fail to take your required minimum distribution, you will be subject to federal penalty.

Your initial RMD is for the year in which you turn 70½.

However, the IRS gives you a bit of leeway on this preliminary distribution. You must take it by April 1 of the year following the year you turned 70½.

So, if you turned 70½ in 2012, you have until April 1, 2013, to take your initial RMD for 2012.

Since income tax rates are currently scheduled to increase in 2013, you may want to go ahead and take your RMD in 2012 — and lock in the lower tax rate. Additionally, even if you postpone taking your initial RMD until April 1 of the following year, you still must take another RMD for the 2013 tax year by Dec. 31, 2013.

Being required to take two RMDs in one year could end up pushing you into a higher income-tax bracket.

The amount of your required minimum distribution is based on your age, the balance of your account as of Dec. 31 of the previous year and a life-expectancy factor from the IRS tables.

If you have more than one IRA or retirement plan, the RMD needs to be calculated on each account. However, you can take the total RMD from one or more of your IRAs or applicable retirement accounts. So, the 2012 RMDs are based on the balance of your IRAs and applicable retirement accounts as of Dec. 31, 2011.

Keep in mind that Roth IRAs and Roth 401(k)s do not have required minimum distribution mandates.

If you turned 70½ this year, you may want to discuss your RMD withdrawal options with your tax adviser so you can determine the best strategy for your specific situation.

-- Laura Medigovich is a certified financial planner and vice president for M&T Bank's Hudson Valley region. The views expressed by the author are her own and are not endorsed by M&T Bank, M&T Securities or their affiliates.